British expat retirees risk being hit with hefty additional tax burdens from
April 6, when the lifetime allowance for pensions drops

The lifetime allowance threshold for pensions (LTA) will be reduced from £1.5m to £1.25m on April 6. It applies to an individual’s entire pension savings, apart from the state pension.

Once the cap is reached, the tax rate on the excess is up to 55 per cent, meaning that a person with £1.45 million in their pension could be subject to a tax charge of £110,000 next month.

The LTA was first introduced in 2006. It was £1.8m by 2010-11, but cut to the present £1.5m in 2012.

Independent financial advisory organisation the deVere group (www.devere-group.com) found in a survey of its clients that almost half (46 per cent) who are over or near the LTA threshold have yet to take any action to mitigate the effect of the reduction.

Nigel Green, the founder and chief executive of the group, said: “It’s astonishing that such a high number of savers, most of whom have worked hard all their lives to be able to enjoy the retirement they want, are putting themselves at risk of being hit with a tax of up to 55 per cent.”

He added: “Perhaps one of the reasons for this lack of action is that many people believe that the LTA changes will not affect them. The truth is that it will affect many more hard-working savers than might be expected. Many will reach the threshold sooner than they think as values of portfolios increase.

“Even if a pension pot is significantly below £1.25 million today, it is perfectly possible for many in their 30s and 40s today to accumulate pension savings of £1.25 million by the time they retire.”

Mr Green said that while independent financial advice should be sought as to individual circumstances, there are several ways to reduce the adverse effects of the reduction in the LTA.

One is to apply to Her Majesty’s Revenue & Customs (HMRC) for "fixed protection 2014" status before April 5 2014. This is designed to protect those who have built up pension pots of more than £1.25m but no more than £1.5 million, according to HMRC (hmrc.gov.uk/pensionschemes).

It will allow savers to maintain the current lifetime allowance of £1.5m, but freezes the pension as it is, and does not allow any further contributions to be made.

"Another option, which is available for Britons living overseas, is to transfer the pension into a HMRC-recognised Qualifying Recognised Overseas Pension Scheme (QROPS)," said Mr Green.

"When a pension is transferred into a QROPS it is tested against the LTA at that time."

He believes this is why the deVere group, which has 80,000 clients worldwide, has experienced a surge of interest in this option recently.

Justin Harris, managing director of Chase Belgrave (chasebelgrave.com), another independent financial advisory company, said it would be wise for expats to check their pension funds ahead of the rule change.

"Recent rising markets could have grown your pension pot considerably over the past year," he noted.

Mr Harris added that since fixing the pension before April 5 means no more payments can be made into it, transferring it overseas is a "far better option".

"This will allow you to escape the lifetime allowance restrictions, and these might become more onerous as time goes on," he said.

"Additionally, we would expect a pension pot to grow at around five per cent or more per year. At this rate, even if you stopped contributing to a £700,000 pension pot, it would exceed the new Lifetime Allowance within 15 years, and so become liable to that 55 per cent charge even without further contributions."